July 30, 2013

Gift Card Taxable as Compensation

Question:

Our church recently decided to provide a monthly gift card to one of our members who cleans the church on a weekly basis for no compensation.  Does this monthly gift need to be reported as income to the IRS?  

Answer:

This should be reported as taxable compensation. Because the member is performing services for the church, any non-cash payment should be reported as compensation for those services. While the gift card is not technically cash, it is still taxable as an item of value provided to the member in exchange for the work performed. According to IRS Pub. 525, "In most cases, you must include in gross in­come everything you receive in payment for personal services. In addition to wages, salar­ies, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options."

July 25, 2013

MinistryCPA Special Topic: Social Security

Periodically throughout the next few months, we will cover various topics relating to Social Security, following our usual question-and-answer format.  We plan to cover topics of interest to a broad group of readers, since individuals who are just beginning to pay into Social Security should be just as concerned about the state of their benefits as individuals just a few months from retirement. The first question relates to Social Security Statements.

Question:

In the past, the Social Security Administration (SSA) mailed periodic statements, which reported my up-to-date record of earnings and projected benefits. Since the SSA no longer mails periodic Social Security Statements, how can I get access to this information?

Answer:

Just as with any other savings plan, it is important to track your earnings and understand your projected benefits through Social Security. You can create a personal Online Social Security Account for online access to benefits and earning information. 

To request a paper statement in the mail, simply follow the link below to a printable form.

July 24, 2013

MinistryCPA Special Topic: Motivations for Giving to God's Work

Question:

One of the wealthy men in the church was overheard by a member of the youth group, "I wish the preacher would stop ranting about giving all the time! I've got to be the biggest giver in the church already. You'd think our church was on the edge of financial ruin!" Later, at the dinner table, the young person still wrestled with the ramifications of what the man had said, "Dad and mom, why does our pastor preach about giving?" What Biblical response can these parents offer to their inquisitive teenager?

Answer:

Dad and mom could first remind their child of the Apostle Paul’s response when addressing a similar question, “Every man according as he purposeth in his heart, so let him give; not grudgingly, or of necessity: for God loveth a cheerful giver” (II Corinthians 9.7). The reasons (Paul, “purposes”) for giving to God’s work, His workers and to others is a private matter of the heart. If others cannot give joyfully, we might feel sorry for them, but we cannot allow their attitudes to affect ours.

God hates an unthankful attitude. Receiving an abundance of provision from God and then failing to respond with a desire to serve Him and an attitude of joy and gladness brings the judgment of God.

Moreover all these curses shall come upon thee, and shall pursue thee, and overtake thee, till thou be destroyed; because thou hearkenedst not unto the voice of the Lord thy God, to keep his commandments and his statutes which he commanded thee: And they shall be upon thee for a sign and for a wonder, and upon thy seed for ever. Because thou servedst not the Lord thy God with joyfulness, and with gladness of heart, for the abundance of all things (Deuteronomy 28.45-47).

The teen’s pastor is simply teaching and preaching the commands of Scripture that he is responsible to deliver. As a mentor of young preachers, the Apostle Paul commanded Timothy to 

charge them that are rich in this world, that they be not highminded, nor trust in uncertain riches, but in the living God, who giveth us richly all things to enjoy; That they do good, that they be rich in good works, ready to distribute, willing to communicate; Laying up in store for themselves a good foundation against the time to come, that they may lay hold on eternal life (I Timothy 6.17-19).

Finally, Moses commanded the people in his day not to think of giving as losing possessions, but as gaining God’s joy in the act of giving and in one’s outlook on life in general.

If there be among you a poor man … thou shalt open thine hand wide unto him. Thou shalt surely give him, and thine hand shall not be grieved when thou givest unto him: because that for this thing the Lord thy God shall bless thee in all thy works (Deuteronomy 15.7-10).

Perhaps without making an indiscreet direct reference to the wealthy men in the church, the parents can help their teenager connect the passages to the recent conversation that was overheard.

July 22, 2013

Designated Gift to a Missionary

Question 1:

A church recently held an ordination service for one of its members, who is planning to go on a foreign missions trip. During the service, a $1,000 special offering was taken. Is this offering taxable for the missionary? Is it deductible by the donors?

Answer:

Yes, the offering is taxable as compensation. Because the missionary is "self-employed" for income tax purposes, the church should issue Form 1099-MISC, and the missionary should closely track and report business expenses to facilitate deductibility of those expenses. The gift is also deductible by the donors, because it is viewed by the IRS as a congregational gift. The key is initiation of the gift: a gift to an individual initiated and controlled by the church is deductible by the donors.

Question 2:

After the offering has been given to the missionary, a friend gives another gift to the church. This gift is designated for the missionary, but "to be used as the church sees fit if the trip is fully funded." Can the church simply give this money to the missionary? Is it deductible by the donor?

Answer:

Because this gift is under the control of the church, it is deductible by the donor. If this gift were simply given by the donor directly to the missionary, it would not be deductible. However, because the church can use the gift as it sees fit, it is a deductible contribution. The church can pass this gift along to the missionary within the same guidelines as the original gift. 

July 18, 2013

MinistryCPA Special Topic: God Gives the Ability to Gain Wealth

Question:

A young man posits a question to his Christian grandfather: “Grandpa, I hope that I can someday have the smarts that you have. You have so much cool stuff—and you are always paying the bill at the restaurant and giving money to people. What is your secret to success?” How should a godly grandfather respond biblically to his grandson’s question?

Answer:

A Christian family might have an attitude that its position of wealth came from shrewd business strategies and hard work. At least at a time when he felt he needed an explanation to offer to his wives for his accumulation of wealth, Jacob credited God for his extensive possessions.

Thus God hath taken away the cattle of your father, and given them to me (Genesis 31.9). 

Moses warned the people of Israel not to think of their possessions in this way: And thou say in thine heart, My power and the might of mine hand hath gotten me this wealth. But thou shalt remember the LORD thy God: for it is he that giveth thee power to get wealth, that he may establish his covenant which he sware unto thy fathers, as it is this day (Deuteronomy 8:17-18).

The grandfather might first respond to his grandson by acknowledging the contributions of others whom God has used to enable his success. Consider the Apostle Paul: he recognized others for their support that God blessed, closing his letters often with final words that would resonate long with his readers (e.g. the church at Philippi (Philippians 4.10ff); Aquila and Priscilla (Romans 16.3ff)). 
  
The grandfather could also emphasize that having “cool stuff” can often be a distractor to what is actually most important. Jesus said, “Take heed, and beware of covetousness: for a man's life consisteth not in the abundance of the things which he possesseth” (Luke 12.15). Being generous with others is just one way that God helps him to keep in perspective that his wealth is really not his own. It has been given to the young man’s grandfather by God in trust that he would use it as a faithful ambassador of God’s good will and as a steward of God’s possessions.  

Finally, he has no “secret of success.” Others have taught him, experience has prepared him, and God-granted discipline has sustained him to serve others. Those whom he has served have paid for the goods and services that he has sold to meet real and legitimate needs in their lives, families, and enterprises. His work has been blessed by God. Even Satan recognized that God had “blessed the work of [Job’s] hands, and his substance is increased in the land” (Job 1.10). Job said, “Naked came I out of my mother’s womb, and naked shall I return thither: the Lord gave” (1.21). If God blesses one of His children with material possessions, he or she should only view it as a stewardship opportunity and responsibility, not as a validation of his or her own shrewdness.

MinistryCPA Special Topic: Introducing God's Way of Giving

First, God gives. Then, Christians respond to His generosity (1) by giving Him thanks, (2) by giving to God’s work and His workers, and (3) by giving to others. You may not find a more succinct, yet comprehensive, framework for God’s Way of Giving in the Bible than that found in Deuteronomy 26.1-13.

God is the model giver—without equal. There are more than 735 specific references in the Scriptures to giving. Well over half relate to giving by God to men.

         James said (1.17) “Every good gift and every perfect gift is from above.” God is the originator of every good and perfect gift.

         Peter said (II Peter 1.2-3) that God has “given unto us all things that pertain unto [our] life (physically, materially, socially) and godliness (spiritually).”

Over the next weeks and months, as time permits, MinistryCPA will share with our readers our understanding from the Bible of God’s Way of Giving. We will do so in our standard, Question and Answer format.

July 11, 2013

Church Car Purchase for Pastor

Question:

A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement?

Answer:

The church has two main alternatives for this purchase: 
  • Title the car in the pastor's name and reimburse him for business expenses
  • Title it in the church's name and treat personal use as taxable compensation
There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post.

If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The church can reimburse him at the standard mileage rate for any business use of the car. Under this arrangement, he should keep a current, detailed log of business use in order to facilitate reimbursement of business expenses. If the church chooses to give him the car outright, he will also be personally responsible for repair, upkeep, and insurance expenses. To the extent that those expenses are paid by the church, they will be treated as taxable compensation.

If the church chooses to purchase the car in its name, the immediate tax consequences are more advantageous to the pastor. The church can, and should, pay all expenses, including insurance, repairs, upkeep, and fuel. To the extent that he uses the car for business use, he should keep a log, but the church will not be required to report taxable income to its pastor. Any personal use will be taxed as compensation at the standard mileage rate, unless the pastor chooses to reimburse the church at that rate for any personal use. The standard mileage rate for 2013 is $.565 per mile. The key difference is that all expenses can be paid by the church, with only personal use taxed. However, if the car is given outright to the pastor, the value of the car itself is taxed, and only expenses directly related to business use can be reimbursed with no tax consequences.

This blog response has been prepared assuming that the church will be purchasing a car, rather than simply reimbursing the pastor for business use of his personal car. While each treatment has its advantages, registering the car in the church's name is especially recommended if the car will be used largely for business purposes. Any church considering a purchase of this size should consider the benefits and tax consequences of each treatment in order to make the best decision.

Charitable Contribution for Travel to Training Conference?

Question:

A group of church members are traveling out-of-state to a conference for training to lead discipleship groups. Are contributions made towards travel expenses for this trip deductible?

Answer:
 
While the answer to this question can change based on the circumstances of the specific situation, a few principles hold true across the board. According to IRS Pub. 526: "Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses.

"The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses."


In this situation, the church should carefully consider the purpose of the trip and the duties of the participants. Are the members traveling to the conference simply to enrich their personal skills? Will they provide services to the church based on this training? Travel expenses for personal enrichment are not eligible for a charitable contribution, because they provide no benefit to a tax-exempt organization. Even a church-sanctioned trip does not necessarily qualify if no qualified volunteer services will be performed for the church as a result of the training. 


The Publication does provide several examples of activities that the IRS believes qualify or do not qualify. If these tests can be passed, then a charitable deduction claimed on Schedule A (Form 1040) is appropriate. This is true regardless whether the payments were made directly by the taxpayer or indirectly through the church. 

For more on this topic, follow the link below:

Travel Expenses for Ministry Trips

Also, see IRS Publication 526.

July 02, 2013

Church Filing Requirements as a 501(c)(3)

Question:

Is a church required to apply for 501(c)(3) tax-exempt status and file an annual report with the IRS?

Answer:

Generally, churches are not required to file annual reports with the IRS or apply for tax-exempt status. Non-church tax exempt organizations must submit to often rigorous requirements that churches fortunately escape. These include Form 1023 to apply for recognition as a tax exempt organization and Form 990 to annually disclose financial and other information. 

The exception to the rule exempting churches from annual filing relates to at least two instances when Form 990 may be filed:
  • Unrelated business income tax (UBIT): according to IRS Pub. 598, a church which earns income from a "trade or business not substantially related to its exempt purpose" (excluding rental income from real property) will be required to report that income on Form 990-T.
  • Small Business Healthcare Tax Credit: a church which qualifies for and claims this credit will be required to file Form 990-T and Form 8941. 
While these rules apply to IRS filing at the federal level, there may be state and local government filings that congregations must prepare. Churches that choose to incorporate should be especially careful to understand what filings will be required at the state level.

Additional information on this topic is available through the link below.

Church Annual Filing Requirements

Charitable Contributions Made Through PayPal

Question:

A tax-exempt organization would like to begin accepting donations through PayPal. How should the organization treat the service fee that is charged for each transaction? Can the donor claim a deduction for the full amount of the contribution, or for the contribution minus the service fee?

Answer:

With the widespread use of technology to make donations and other banking transactions easier, many organizations will soon have to face this issue. Fortunately, application of accounting principles will lead to an understanding of the correct treatment from the perspective of both the donor and the charitable organization.

A charitable organization accepting donations through PayPal should use revenue recognition principles consistent with those employed in any other situation. Therefore, in order to accurately reflect the details of the situation and the intent of the donor, the full amount of the contribution should be recognized as income. The service fee should then be recorded as an expense. For example: a donor wishes to contribute $100 towards a qualified organization. If PayPal charges a 5% fee, the organization will record $100 of income and an expense of $5. This results in a $95 net cash increase and an accurate reflection of the physical events of the transaction.

Based on this treatment, a donor who gives through PayPal will be able to deduct the entire amount of the contribution, disregarding the service fee. Because the fee is a cost incurred by the organization, the $5 of his donation that covers the fee has been used for the benefit of the organization just as much as the $95 that is left for other use. The organization's choice to facilitate contributions through PayPal has no bearing on the deductibility of the donor's gift.

Deductibility of Designated Gifts to a Minister

Question:

A member of a church would like to make a weekly donation to the pastor through the general fund, with a check designated as a gift for the pastor. Is this donation tax-deductible? Is it taxable to the pastor since it is a gift?

Answer:

The key in this situation is to realize that, as a general rule, the gift will be either 1) non-taxable to the recipient and non-deductible to the donor or 2) taxable to the recipient and deductible by the donor. IRS Publication 526 prohibits deduction of contributions to individuals: "You cannot deduct contributions to specific individuals." However, through church-initiated actions to individuals are treated differently because churches are non-profit organizations for tax purposes.

The deciding factors for this question are the initiation and control of the gift. Gifts initiated by the leadership or the congregation as a whole, even if directed toward an individual, are deductible because they are regarded as a corporate act. In virtually all cases, gifts initiated by the church body or leadership given to a pastor or other employee of a church are regarded as compensation for services performed and are deductible to the donors. In general, gifts given by an employer to an employee are taxable unless they are non-cash and less than $25 in value. Further, gifts of this nature are regarded as under the control of the church, and consequently are deductible. Therefore, if the intent of the donor is to give to the pastor as part of a church-initiated gift and to enjoy the benefits of a charitable contribution deduction, this treatment will apply.

A note of caution: A church must be very careful to avoid becoming a conduit for payments of personal obligations that would otherwise be non-deductible. For example, a church member who owes money to the pastor or another church employee cannot repay that money through tax-deductible contributions to the church offering designated to the pastor. However, if a church member gives to the missions fund to support a particular missionary identified by the church congregation as worthy of support, the donation can be deductible to the donor and taxable as compensation to the missionary.

If a donor gives a personal gift through the church for the sole purpose of maintaining anonymity, the gift will be non-taxable to the pastor, and is regarded as a non-deductible gift to an individual.